What is equity in trading? It is the current value of your trading account, calculated by adding any unrealised profits to your account balance or subtracting any unrealised losses from it.
Unlike your balance, which changes only when you close a position or make a deposit or withdrawal, your equity moves as the value of your open positions changes.
Equity is an important measure of account health because it affects how much free margin you have available. It also shows how close your account may be to a margin call or stop-out.
Trading costs can reduce your equity too. For example, the spread affects a position as soon as it is opened, while overnight fees may apply when you keep a position open beyond the trading day.
Understanding equity can help you monitor risk and manage leveraged positions more carefully.
Quick Takeaways
- Equity is the current value of your trading account, including unrealised profits and losses.
- Your balance remains unchanged while positions are open, but your equity can move continuously with the market.
- Trading costs, including spreads and overnight fees, can reduce your equity.
- If your equity falls too low in relation to your used margin, your broker may issue a margin call or automatically close positions at the stop-out level.
What Is the Difference Between Balance and Equity?
Understanding balance vs equity is essential because these two figures serve very different purposes for anyone monitoring a leveraged trading account. The difference between balance and equity is that your balance is a fixed amount that changes only when you close a position, while your equity is the current value of your trading account and changes continuously as the market moves.
Understanding the difference is important because balance and equity serve different purposes. When you have no open positions, they are the same. However, once you open a trade, your equity rises or falls with any unrealised profit or loss, while your balance remains unchanged until the position is closed.
Account Status | Account Balance | Account Equity |
|---|---|---|
No Open Trades | Fixed | Equal to your balance |
Open Trades (Floating Profit) | Fixed | Higher than your balance |
Open Trades (Floating Loss) | Fixed | Lower than your balance |
Trade Closed | Updated to reflect the realised profit or loss | Equal to your new balance |
How Do You Calculate Equity?
You can calculate equity using the following formula:
Equity = Account Balance + Unrealised Profit − Unrealised Loss
For example, suppose you deposit £5,000 into your trading account. You then open a gold CFD position with an unrealised profit of £300 and a forex position with an unrealised loss of £100.
Your net unrealised profit is £200, so your equity would be:
£5,000 + £300 − £100 = £5,200
As market prices change, your unrealised profit or loss also changes, causing your equity to rise or fall in real time.
Can Equity Fall Below Zero?
Under Financial Conduct Authority (FCA) rules, retail clients trading CFDs with a UK-regulated broker benefit from negative balance protection. This means you cannot lose more than the funds held in your CFD trading account, even if extreme market volatility causes prices to gap beyond your stop-loss level.
If your account balance is at risk of falling below zero, the broker is required to absorb the remaining loss. However, this protection generally applies only to retail clients. Professional clients may not be covered by the same safeguards, depending on the broker and the applicable regulations.
How Trading Costs Reduce Your Equity
Your equity is affected by more than market price movements. Trading costs, including the spread, commission, overnight fees and slippage, can all reduce the value of your trading account.
When you open a position, your equity may immediately fall below your balance. This is because the spread and any applicable commission are reflected in your position from the outset, meaning you begin with a small unrealised loss.
If you keep a leveraged position open overnight, you may also incur an overnight fee. This is a financing charge that may be applied when a position remains open after the broker's daily cut-off time. Over time, these charges can add up, particularly if a trade is held for several days or weeks.
Even if a position eventually becomes profitable, accumulated trading costs can reduce your overall return. For this reason, it is important to consider both market performance and trading costs when deciding how long to keep a position open.
Why Equity Affects Your Margin Level and Free Margin
Your equity has a direct impact on both your margin level and your free margin. As your equity falls, the amount of margin available to support existing positions or open new ones also decreases.
When you open a position, part of your equity is set aside as used margin. The remaining funds are known as free margin, which is the amount available to support additional trades or absorb further losses.
If your open positions move against you, your equity falls, reducing your free margin at the same time. Once your free margin reaches zero, you will generally be unable to open new positions. As your equity continues to decline, your margin level also falls, increasing the likelihood of a margin call or stop-out. Understanding what is margin level and how it relates to equity and used margin can help you better assess the health of your trading account and manage risk more effectively.
The Risk: How Fast Can Leverage Wipe Out Your Equity?
Leverage increases your market exposure, meaning even a relatively small price movement against your position can reduce your equity significantly and increase the risk of a margin call or stop-out.
Leverage magnifies both gains and losses. While it can increase potential returns, it also increases the speed at which losses accumulate. Understanding what is leverage in trading is essential because it explains how a relatively small market movement can have a much larger impact on your trading account.
As your equity falls, your margin level also declines. If it drops below your broker's required threshold, the broker may issue a margin call or begin closing your positions automatically in line with its stop-out policy. These measures are designed to limit further losses and help prevent your account from falling into a negative balance, where negative balance protection applies to eligible retail clients.
Conclusion
Understanding what is equity in trading matters most while you hold open positions, since your account balance shows the outcome of completed trades, while your equity reflects the current value of your trading account. As long as you have open positions, equity is the more important figure to monitor because it changes continuously with market movements, trading costs and the performance of your positions.
Understanding how equity is affected by leverage, margin requirements and trading costs can help you manage risk more effectively. Monitoring your equity alongside your margin level may also reduce the likelihood of a margin call or stop-out during periods of market volatility.
FAQ
What Happens If Your Equity Falls Below Zero?
For retail clients using FCA-regulated CFD brokers, negative balance protection means you cannot lose more than the funds in your trading account. If extreme market conditions cause losses to exceed your account balance, the broker absorbs the remaining loss. This protection may not apply to professional clients.
What Is the Difference Between Free Margin and Equity?
Equity is the current value of your trading account, including unrealised profits and losses. Free margin is the portion of your equity that is not being used to support open positions and can be used to open additional positions or absorb further losses.
Does the Spread Affect Equity?
Yes. When you open a position, the spread is reflected immediately, so your equity is typically lower than your balance from the outset. Any applicable commission or overnight fees can also reduce your equity over time.